By Julie Simpson, Senior Consultant
Recently, we surveyed travel managers to find out how they are compensating their travel management companies (TMCs). Not much has changed since commissions to travel agencies went away in 2002. When that happened, there was an immediate shift to transaction-based pricing which still dominates today.
Larger programs with dedicated staff are more likely to have a Cost Plus structure where a management fee is paid on top of direct operating expenses (DOE) reimbursed as actual.
There are advantages to both models. Transaction fees are easily audited and budgeted. The downside is that the client has no recourse if service drops off due to reduced staffing. Service Level Agreements (SLA) help managed that process if penalties are part of the agreement. Cost Plus allows the client to direct the TMC to increase or reduce staffing as necessary. But it is more difficult to audit or budget and requires more commitment from the client.
As more travel shifts online, Cost Plus arrangements will become even more scarce, as the need for dedicated staffing will diminish. Ideally, there will be fewer transactions managed offline with those that remain receiving a high quality of service at a price that makes sense.
Are there alternates and is it time? There has been recent buzz around subscription pricing. While this would have gained no traction even five years ago, entertainment (Netflix, HBO, Hulu, Spotify, Pandora and others), software (cloud storage, cyber security, among others), and goods and services (anything from razors to wine, workout clothes, pet toys, and even linens) have made this the norm in many aspects of our daily lives.
With this in mind, we asked travel managers how they felt about subscription pricing:
Over 25% thought it might make sense while over 60% didn’t rule it out immediately; however, almost 10% aren’t interested.
So how would it work? A company could pay a monthly flat fee for travel management services or perhaps a fee per traveler. It is likely that there would be a limit to the number of transactions processed before the subscription goes up – so transactions still matter. If TMCs establish subscriptions according to company size or travel spend, it would greatly reduce the time and effort to create bills for each customer. The danger for companies is that they could end up paying more for services than they would in a transaction fee world.
We also surveyed the current practice of asking the TMC to return commissions earned on sales for our customers. Fewer companies are asking that the commissions be returned, no doubt because it is difficult to audit and TMCs complain about the extra work of tracking. At GoldSpring, we have witnessed significant variances in the commission amount returned for the same business when the TMC is changed so yes, it is difficult to audit. However, are you sure that the fees charged when commissions are retained are lower than they would be if commissions were returned?
Make sure that benchmarks consider the differences. One approach would be to enter into an agreement where commissions are returned and monitor performance for a period of time, then renegotiate a reduction of fees in return to giving up commission income. Service Level Agreements, tied to Satisfaction Surveys, will be key so we’d also recommend creating a traveler feedback loop by surveying to understand the other side of TMC costs – the service delivered.
So, are we poised for a TMC compensation revolution? At the current time, it seems the answer is no. This will, however, be an interesting area to keep an eye on, particularly in light of the 90% of respondents to our survey who haven’t completely ruled it out. As more Millennials, who are very comfortable with the subscription model, take over more travel manager roles, perhaps adoption will accelerate.
In the meantime, if you have questions about assessing or benchmarking your TMC, or would like to evaluate whether or not a subscription model could be right for your program, please feel free to reach out directly at julie@goldspringconsulting.com.